BREAK EVEN. THEN DECIDE.
Slide the costs until the break-even point moves, type over a cash-flow forecast until a month turns red, and appraise an investment on payback, ARR and NPV.
Break-even, live
FIG. 01 · FINANCIAL PLANNING · 2.3.1Price minus variable cost is contribution — what each unit gives you towards the fixed costs.
The level you actually expect to sell. The gap back to break-even is your margin of safety.
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What the exam wants: 2.3.1 is a calculation you must be able to do cold — break-even = fixed costs ÷ contribution per unit, margin of safety = actual output − break-even output. The chart is where the analysis marks live: watch what a £1 price cut does to contribution versus what the same £1 off variable cost does, and notice that fixed costs move the break-even point without changing the slope of anything.
The month it goes red
FIG. 02 · CASH FLOW · 2.2.2| Month | Apr | May | Jun | Jul | Aug | Sep |
|---|---|---|---|---|---|---|
| Cash in | ||||||
| Cash out | ||||||
| Net flow | ||||||
| Opening | ||||||
| Closing |
Every closing balance becomes the next month's opening balance — that chain is what the question is really testing.
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What the exam wants: a profitable business can still fail, and this grid is why. Cash flow is about timing, not profitability — the "big order, 60-day terms" scenario books more revenue and still drives the balance negative, because the cash arrives two months after the costs. Name the month, quantify the shortfall, then propose a remedy (overdraft, invoice finance, tighter credit terms, deferred capital spending) and evaluate its cost.
Is it worth doing?
FIG. 03 · INVESTMENT APPRAISAL · 3.3.2| Year | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| Net cash flow | ||||||
| Cumulative | ||||||
| Discounted |
The cost of capital, or the return the money could earn elsewhere. Raise it and distant cash is worth less today.
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What the exam wants: three methods, three different answers — that disagreement is the evaluation. Payback ignores everything after the money comes back, ARR ignores the timing of it entirely, and NPV handles timing but is only as good as the discount rate you guessed. Try "front-loaded" against "slow burn": similar total profit, very different payback and NPV. State which method suits the decision (liquidity-constrained firm → payback; long-lived capital project → NPV) and say why.